Houthi Attack: Experts Predict Global Trade Disruption On Red Sea Routes

Experts have predicted disruption in global trade as shipping companies announced suspension of shipping through the Red Sea and Suez Canal, over attack by the Houthis rebels.

LEADERSHIP reports that the Red Sea and Suez Canal are one of the world’s most important maritime trade routes but there are extended concern among international shipping giants about attacks on ships in the Red Sea by Iranian-backed Houthi militants, who say they are taking revenge against Israel for its military campaign against Hamas.

This is as global economists and analysts have predicted that Brent crude would average $82.56 a barrel this year, up slightly from the 2023 average of $82.17, with weak global growth expected to cap demand.

They further noted that geopolitical tensions, however, could support prices.

In China, investor expectations of economic stimulus measures rose after manufacturing activity shrank in December for a third month, government data showed on Sunday and any such stimulus could boost oil demand and support crude prices.

The disruption to global supply chains is already pushing up freight costs and lengthening delivery times.

However, shipping companies such as Maersk, Hapag-Lloyd, Evergreen Line and MSC Mediterranean Shipping Company, have all stopped using the critical waterway due to attacks by Houthi rebels.

In a chat with LEADERSHIP, the Master Mariners warned that a prolonged campaign targeting commercial vessels at the Red Sea could disrupt the global economy by delaying deliveries of goods, fuel, food, and pushing up prices.

The president of National Association of Master Mariners (NAMM), Capt. Tajudeen Alao, said rerouting of vessels to other shipping routes would drive up freight cost and insurance premium.

“The Red Sea route is the shortest and the cheapest for vessels from Europe, Mediterranean going to Asia, Hong Kong, Singapore and China Axis. What it means is that those vessels coming from China will pass through Malacca Strait off Madagascar through the South African Cape to Europe. It’s a longer route and that means more fuel consumption, longer time and freight will go up.

“Vessels going to Asia will pass through West Africa and go through offshore Nigeria to South Africa. It’s a longer route and they have to stop along the way to take a bunker. It could be in Nigeria, Dakar or off Cape in South Africa.

But ships from the US can go through the Panama canal to Asia, but Asia is where shipping is.”

Capt. Alao, however, explained that the Houthis’ attack had no effect on vessels calling Nigerian seaports from Asia or Europe.

“Vessels coming to Nigeria don’t have business with the Red sea, they come through Indonesia, Malacca strait and straight down to South Africa to Nigeria. Nigeria isn’t affected, big container vessels such as Ever Given must go through the Suez Canal to drop their containers. They will drop in Jeddah for Saudi, drop in East Africa or continue straight to Singapore, Hong Kong for transshipment to Australia, Taiwan, Korea, Japan, China, these are manufacturing countries.

“It will affect global trade and the implication is huge because the countries across West Africa that have facilities for bunkers will benefit. There are many supertankers when they cross South Africa. We don’t have facilities for bunkering vessels in Nigeria,” he revealed.

On his part, Capt. Ade Olopoenia, also reiterated that the disruption to global trade would be enormous.

Olopoenia, a former president of NAMM, stated that Asia and Europe are drivers of world trade and most vessels go through the Suez Canal and the Red Sea to deliver raw materials and finished goods.

“It’s a global issue. If vessels don’t pass through the Suez Canal, they will go round through the Cape of Good Hope to South Africa. It means vessels will spend an extra 10 days and when doing that, they incur additional fuel, pay salaries and with this, supply chain will be disturbed because all the containers that are supposed to go to Europe in two or three weeks, will add an additional 12 days to it.

“Insurance premium will go up with other multiplier effects. The effect of Ever Given vessels that was trapped in the Suez Canal  lingered for over 6 months after it was cleared because of the line up of vessels. But in this case, vessels have to go round and this has wider economic implications.

“The implications are so enormous for the world economy. The whole international economy will be affected and the cost of shipping will be enormous. Asia and Europe are drivers of world trade and most vessels going there will go through the Suez Canal. The disruption will be enormous on global trade,” he said.

Meanwhile, oil prices dipped during the first session of 2024, with economic headwinds from interest rate jitters unravelling gains from worries that tensions in the Red Sea could disrupt supplies.

Brent crude was down 62 cents, or 0.8 per cent, to $76.42 a barrel while the U.S. West Texas Intermediate crude was down 72 cents, or 1 per cent, at $70.93.

Prices rose briefly in early trade after attacks on vessels in the Red Sea by Houthi rebels over the weekend.

Both benchmarks rose around $2 before retreating. “The reality is there are no material supplies of crude oil at risk and no supply has been disrupted.

To the extent of vessels transiting around the horn of Africa, it adds to costs but we are not losing supply”, said , partner with Again Capital LLC, John Kilduff.

U.S. helicopters on Sunday repelled an attack by Iran-backed Houthi forces on a container vessel operated by Danish shipper Maersk in the Red Sea.

An Iranian warship had entered the Red Sea on Monday, according to the semi-official Tasnim news agency.

Denmark’s Maersk and German rival Hapag-Lloyd said their container ships would keep avoiding the Red Sea route that gives access to the Suez Canal.

A wider conflict could close crucial waterways for oil transportation.

Meanwhile, traders tempered expectations around interest-rate cuts, which pressured oil prices along with a stronger dollar and softer equity markets.

Stock prices slipped as the yield on 10-year U.S. Treasury notes, the benchmark for global borrowing costs, briefly reached a two-week high, indicating falling demand for Treasury bonds.